Senior finance executives reported that their companies derived 50 percent or more of their revenues from services.
Technology and globalization have reshaped businesses in North America; the cloud, and mobile and connected devices have enabled new business models and the emergence of the services economy. According to new research from FinancialForce, CFOs have already retooled much of their businesses to draw more revenue from services (including professional services, subscription-based services, software/apps delivered as a service, managed services and usage-based contracts), which are making up a larger portion of revenue than ever before.
Because of these new business models, the role of the CFO and finance department has grown dramatically. No longer an office running in background known mainly for “cost effective” changes, the office of the CFO has grown to be known as a prized strategic advisor. With an extensive knowledge of market intricacies, customer needs and aggregate data, CFOs and their teams are uniquely positioned to understand the ever evolving flow of money and interest around a business’s products, ultimately helping to smartly steer the company in a positive direction.
CFOs see services as the future of business growth in the United States
Recently, there’s been a flurry of interest and calls to revive the U.S. manufacturing industry. Manufacturing and manufacturing employment has been dropping in the U.S. for nearly four decades. When President Trump sat down with business leaders at the White House, he had a very clear and poignant message for them; bring back American manufacturing jobs.
But research suggests North American CFOs have already moved beyond manufacturing and selling goods. In the earlier mentioned survey of CFOs, one third of respondents said that subscription-based services have become significantly more important for their companies over the past five years. Almost three quarters (71 percent) of senior finance executives reported that their companies derived 50 percent or more of their revenues from services. And slightly more than a quarter (28 percent) reported that all their companies’ revenues are service-related.
The data indicates that CFO’s are not looking to expand their manufacturing portfolio, but are redirecting their companies to deliver products as-a-service. For example, software and infrastructure, grooming products, news, music and movies, and even food and wine are all being delivered as services with customer subscriptions creating new recurring revenue streams.
Take Amazon for instance. It sells physical goods on behalf of companies (most of the products are not manufactured in the United States), yet much of its revenue comes from Prime memberships, and the delivery of food, video, music and books as a service.
In adding services into the mix, product-based companies can work to keep their customers from falling into a rival’s clutches, extending what used to be a single transaction into an ongoing relationship.
A more customer-centric finance function is emerging, leading to changes in the finance office
With a quarter of respondents stating that their company’s motivation was to achieve a more stable recurring revenue stream, the shift to services shows a long term growth strategy on the part of CFOs. They can now more freely differentiate and optimize profitability.
However, inherent in this shift, comes the reality that customer satisfaction has never been so vital to protecting revenue streams. Two-thirds of CFOs say they feel “substantial pressure” to become more customer-centric and focused on renewal revenue streams, and 44 percent of financial executives say they are becoming “more involved in product/service pricing decisions.” This suggests that CFOs are very aware of the central role that the customer plays in emerging service and subscription business models.
With access to payment and invoicing information, marketing, customer satisfaction and the latest market research data, CFOs can see the direct impact of customer experience on sign-ups/subscriptions and revenue. With this information CFOs move beyond the stereotype of being number crunchers and evolve to become influencers of customer experience, helping business make better-informed decisions about their services offerings in order to drive meaningful growth.
No pain, no gain
Clearly this will not be a pain free process, but nevertheless, it is one that CFOs are actively pursuing.
Boosting the transformation of the business requires developing—or acquiring—new skill sets both inside and outside the finance office. Almost half of all CFOs (46 percent) believe that generating more revenue from services will require their company to make substantial changes in strategic planning. To make these changes, CFOs will require analytics-driven insights to craft deep understanding of the company’s financial performance, risks and opportunities.
There will also be company-wide changes to ensure that all departments are engaged in customer satisfaction, retention, and renewals, as well as product development. In pushing these changes and by being able to openly test new business theories and having the data to compare future what-if scenarios for customers and products, CFOs will become indispensable to companies as they will drive the development of the emerging future of business.
Finding the right tools
As of now, many companies have yet to make the necessary changes in their infrastructure. When asked to respond to a statement that their company’s “operational and technology infrastructure” can handle “any increase in service-related revenues,” fewer than one in five respondents (17 percent) said they strongly agreed. However, change will come. Investing in the right tools to ensure a business as service model will be essential in delivering high-quality services to customers and combating competitors.
The new services economy is leading to dramatic business-wide changes and is transforming the role of the CFO and the finance office. As the evolution of the as-a-service business model continues to take hold, businesses that are unprepared for the changing business model are realizing that they may be overtaken by more forward-looking organizations.
John Bonney is the CFO at FinancialForce.•